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Key Text Guidelines for Public Financial Management Reform

Author: Commonwealth Secretariat
Date: 2006
Size: 35 pages

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Summary

Reform of ineffective public financial management (PFM) systems, processes and institutions in developing countries is critical to generate more and better services for citizens. The Commonwealth Secretariat draws on case studies from Commonwealth countries and previous reports to provide universally accepted principles, best practices and processes for PFM reform. Successful reform should take account of local conditions and focus on both the process of reform as well as substantive changes to the fiscal framework.

PFM concerns the effective management of the collection and expenditure of funds by governments. Societal needs are inevitably greater than resources available to government, therefore all public resources must be used as efficiently as possible with minimum government wastage.

While the guidelines are modelled along international best practice, they do not provide definite prescriptions for PFM reform. They are a reference tool for change managers in PFM, and should be adapted to suit different national environments and local dynamics. Examples are drawn from the South African PFM reform experience and best practices from other Commonwealth countries including Australia, Canada, India, Malaysia and Malta.

To achieve the correct enabling environment for the process of PFM reform, a number of key principles should be applied.

Reforms should be part of a home-grown, country led overall strategy. Donors can contribute funds, ideas, technical skills and supportive strategies.
Reform must start with sound policy formation at macroeconomic level. This includes deciding where and with which instruments the state should intervene in the economy. The framework of government, key institutional arrangements and macro-economic policy also need defining.
Sustained political commitment at the highest level is essential. The Ministry of Finance should have the strongest possible political authority to oversee PFM.
Key institutions including the central bank, revenue service, and a range of oversight bodies need to be empowered to operate autonomously from government.
Reform needs to be managed through drawing on international best practice and ensuring appropriate human resources are available and utilised. Clear and proactive communication on reform must take place with citizens, donors, government employees, domestic and international markets. Timely and accurate data, as well as good relationships with donors are further requirements.
The progress of reform must be effectively measured and monitored.

Substantive changes to the fiscal framework are also required for effective PFM reform. These include:

Improvement of revenue collection. Revenue services must be properly resourced and motivated to collect tax more efficiently.
Debt and cash must be managed efficiently. Sound principles for deficit funding should be established, efficiencies sought and proper risk management procedures introduced. The government’s borrowing programme must be properly managed.
Effective planning and allocation of resources is vital and planning processes at all levels of government should be developed and institutionalised. The budgeting process must be transparent and inclusive with a focus on output and implementation. The office of the accountant-general must be properly resourced and funded to support strong accounting and reporting procedures.
Effective oversight and monitoring are vital, with clear rules on transparency and reporting and enforceable sanctions for failure. Oversight should be established by internal mechanisms in the national treasury. External oversight bodies are critical, for example, an independent auditor-general, parliamentary committees and a public ombudsman.

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Source: Commonwealth Secretariat, undated, ‘Guidelines for Public Financial Management Reform’, Commonwealth Secretariat, London
Author: Commonwealth Secretariat, http://www.thecommonwealth.org